Notesale: Turn your study into money

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➢ LINKS OF THE VIDEOS RELATED TO THIS CONTENT
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Brief Introduction Of Cost Accounting
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CLICK HERE to watch the video
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IF YOU DON’T KNOW WHAT IS FINANCIAL ACCOUNTING
THEN CLICK HERE

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◼ The above video will give you the brief idea about the limitations
of the Financial Accounting
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What are Cost Concepts?

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◼ In order to understand the general concept of costs, it is important to
know the following types of costs:
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 Concept of Costs in terms of Treatment
1
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These include costs of the price
paid for raw materials and machines, wages paid to workers, electricity
charges, the cost incurred in hiring or purchasing a building or plot, etc
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Chartered accountants
record them in financial statements
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Economic costs
There are certain costs that accounting costs disregard
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For
example, the entrepreneur would have earned an income had he sold
his services to others instead of working on his own business
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Similarly, potential returns on the capital he employed in his business
instead of giving it to others, the output generated by his resources
which he could have used for others’ benefits, etc
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 Concept of Costs in terms of the Nature of Expenses
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These include costs on payment of wages,
rent, electricity or fuel charges, raw materials, etc
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2
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For example, the entrepreneur could have earned a salary had he worked
for others instead of spending time on his own business
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 Concept of Costs in terms of Traceability
1
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They are also
called traceable costs as we can directly trace them to a particular activity,
product or process
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COM NOTES BY A
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Examples of direct
costs include manufacturing costs relating to production, customer
acquisition costs pertaining to sales, etc
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Indirect costs
Indirect costs, or untraceable costs, are those which do not directly
relate to a specific activity or component of the business
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Although we cannot trace indirect costs, they are important because
they affect overall profitability
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Incremental costs
These costs are incurred when the business makes a policy decision
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These include money spent on
advertising, conducting research, and acquiring machinery
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Private costs
These costs are incurred by the business in furtherance of its own
objectives
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For example, costs of manufacturing, production,
sale, advertising, etc
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COM NOTES BY A
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Social costs
As the name suggests, it is the society that bears social costs for private
interests and expenses of the business
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 Concept of Costs in terms of Variability
1
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The business incurs them regardless of their level of production
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Less production will cost fewer expenses, and vice versa,
the business will pay more when its production is greater
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 Solved Examples on Concept of Costs
 Question: Describe the nature of the following costs and give
reasons for your answers
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The cost incurred in advertising: This expense can be –
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Direct cost (traceable to sales)

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Sunk cost (not recoverable)

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Private cost (spent for business interests)

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Variable cost (will vary depending on the volume of output)

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Rent paid for factory premises: This expense can be –
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Accounting cost (spent on procuring facilities for production)

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Direct cost (directly affects manufacturing)

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Outlay cost (spent on procuring access to input, i
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factory)

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Private cost (used for private business interests)

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Fixed cost (does not change with variance in production levels)

❖ SO THIS WAS THE BASIC CONCEPTS OF COST OR YOU CAN SAY
TYPES OF COST, TO UNDERSTAND THE COSTING AS A SUBJECT YOU
NEED TO UNDERSTAND THE CONCETPS GIVEN ABOVE
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Cost Classification (CAS-1)
 CAS means COST ACCOUNTING STANDARDS as in Accounting we
have ACCOUNTING STANDARDS (ASs) in Auditing we have
STANDARDS ON AUDITING (SAs)
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CLICK HERE to watch the video
The above video will give you the complete theory and idea
about CAS-1 and if you want CAS-1 theory in document/pdf
then CLICK HERE
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Cost Accounting Department and its Relation with Other
Departments!
❖ Cost accounting department records, classifies and present cost
information for manufacturing and other activities of the
organisation
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❖ It is, therefore, necessary that cost accounting department should
have a proper coordination with other departments of the
organisation
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CLICK HERE to get the notes of this topic

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Henceforth, we need to
understand the procurement procedure of material as follows:
 Procedure for Purchasing and Receiving of Materials

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Selection of Suppliers
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Receipt of Materials
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Return of Rejected Materials
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Stores Procedure and Documentation of Receipts and Issues of
Stock

➢ Stores department will maintain a record called 'stores ledger' in
which a separate folio is kept for each individual item of stock
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➢ A specimen stores ledger account is given below:

➢ In inventory valuation stores ledger can be prepared by
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FIFO(First in First Out),
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Costing is “the technique and process of
ascertaining costs”

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CLICK HERE to watch the video with respect to this topic
and to understand this concept in a better way

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Perpetual inventory provides a highly
detailed view of changes in inventory with immediate reporting of
the amount of inventory in stock, and accurately reflects the level of
goods on hand
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Effectively, the cost of goods sold includes such elements as direct
labor and materials costs and direct factory overhead costs
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A physical inventory may be manteded by Financial
Accounting rules or the tax regulations to place an accurate value on
inventory, or the business may need to count inventory so
components or raw materials can be restocked
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➢ How Do Perpetual and Physical Inventory Compare?
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It requires automation, and advanced software is
available to help you do it
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⚫ Data – It provides a real-time accounting of your goods—wherever they
are in the process
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Every transaction—quantity and cost—is updated
automatically
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You can create a
record-keeping system
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⚫

Data – You’ll refer to your manual or automated records to
compare previous and existing inventory
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If you use accounting software, it’s easy to run reports
and compare data
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Fees for basic accounting software or apps are minimal to
moderate
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ABC Analysis
➢ Meaning of ABC Analysis:

In case of a big manufacturing unit which uses a large number of
items for production purpose, it becomes difficult to comprehend
such enormous number of items, the unit has to keep in stock
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So, many manufacturing units find it useful to divide materials, parts,
supplies and finished goods into sub-classifications for purposes of
effective stock control
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The second category “B” consists of
25% of total items representing 20% of the total value of stock, while
the third category “C” consisting of 70% of total items represent only
10% of total cost of inventory
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VED analysis

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➢

Meaning

VED analysis is an inventory management technique that classifies
inventory based on its functional importance
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VED
analysis stands for Vital, Essential, and Desirable
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The shortage of items under this category can severely hamper or
disrupt the proper functioning of operations
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If
any of such inventories are unavailable, the entire production chain
may stop
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Therefore, order for such inventory should be
before-hand
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 E- ESSENTIAL CATEGORY
The essential category includes inventory, which is next to being vital
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But
the loss due to their unavailability may be temporary, or it might be
possible to repair the stock item or part
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The
unavailability of inventory under this category should not cause any
stoppage or delays
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Moreover, the easy replenishment of
such shortages is possible in a short duration of time
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Levels of Inventories and Economic Order Quantity(EOQ) Analysis
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In this topic, you will study different types of
stock levels
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The types are 1
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Maximum Level 3
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Average Stock Level
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If stocks are less than the minimum level, then the work will
stop due to shortage of materials
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The time
taken in processing the order and then executing it is known as lead
time
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(ii) Rate of Consumption:
It is the average consumption of materials items in the industry
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(iii) Nature of Material:
The nature of material also affects the minimum level
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Wheldon has given the
following formula for calculating minimum stock level: Minimum
stock Level = Re-ordering Level – (Normal Consumption x Normal
Reorder Period)
(iv) Re-ordering Level:
When the quantity of materials reaches a certain level then fresh
order is sent to procure materials again
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Reordering level is fixed between minimum level and maximum level
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Re-ordering level is fixed with following formula:
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Reordering Level = Maximum Consumption Rate x Maximum Reorder
period
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If the quantity exceeds maximum level limit then it will be
termed as overstocking
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Overstocking will lead to the
requirement of more capital, more space for storing the materials,
and more charges of losses from obsolescence
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The availability of capital for the purchase of materials in the firm
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The maximum requirements of materials at any point of time
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The availability of space for storing the materials as inventory
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The rate of consumption of materials during lead time
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The cost of maintaining the stores
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The possibility of fluctuations in prices of various materials
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The nature of materials
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If the materials are available only during
seasons then they will have to be stored for the future period
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Restrictions imposed by the government
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The limit fixed by the government will become the deciding factor
and maximum level cannot be fixed more than that limit
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The possibility of changes in fashions will also affect the
maximum level
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Danger Level:
It is the level below which stocks should not fall in any case
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Danger
level can be determined with the following formula:
Danger Level = Average Consumption x Maximum reorder period for
emergency purchases
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➢

EXAMPLE:

From the following information, calculate minimum stock level,
maximum stock level and re-ordering level:
(i) Maximum Consumption = 200 units per day
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(ii) Minimum Consumption = 120 units per day
(iii) Normal Consumption =160 units per day
(iv) Reorder period = 10-15 days
(v) Reorder quantity = 1,600 units
(vi) Normal reorder period = 10 days
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Reordering Level = Maximum Consumption x Maximum Reorder
period
= 200 units X 15 = 3,000 units Minimum Stock Value = Reordering
Level – (Normal Consumption x Nominal Reordering Period)
= 3,000 – (160 X 10) = 3,000 – 1,600 = 1,400 units

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CLICK HERE to watch the full tutorial on this topic


Economic Order Quantity(EOQ)

The economic order quantity (EOQ) model is used in inventory
management by calculating the number of units a company should
add to its inventory with each batch order to reduce the total costs of
its inventory
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The EOQ model seeks to ensure that the right amount of inventory is
ordered per batch so a company does not have to make orders too
frequently and there is not an excess of inventory sitting on hand
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The Formula for Economic Order Quantity

Where:
S=Setup costs (per order, generally including
shipping and handling)
D=Demand rate (quantity sold per year)
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H=Holding costs (per year, per unit)


How to Calculate the Economic Order Quantity

To calculate the economic order quantity for inventory you must
know the setup costs, demand rate, and holding costs
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Demand rate is the amount of inventory a company sells each year
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Those costs include warehousing and logistical
costs, insurance costs, material handling costs, inventory write-offs,
and depreciation
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The economic order quantity
model finds the quantity that minimizes both types of costs
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If a company is constantly
placing small orders to maintain a specific inventory level, the
ordering costs are higher, along with the need for additional storage
space
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The shop sells 1,000 shirts each year
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The EOQ formula is the square root of (2 x 1,000 shirts x $2 order cost)
/ ($5 holding cost) or 28
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The ideal order size to
minimize costs and meet customer demand is slightly more than 28
shirts
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CLICK HERE to watch the full tutorial on this topic

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